Rachel Reeves will make additional welfare cuts in her spring statement on Wednesday after the Office for Budget Responsibility rejected her estimate of savings from the changes announced last week.
The chancellor hoped to shift the focus from the benefits cuts, which appalled some Labour backbenchers, to promising to “secure Britain’s future” with a £2.2bn increase to defence spending.
But it is understood final estimates from the OBR suggested the changes announced by Liz Kendall, the work and pensions secretary, which included tightening the criteria for the personal independence payment (Pip), would not save the £5bn needed to meet Reeves’s self-imposed fiscal rules.
The chancellor is expected to announce an additional £500m in benefits cuts to make up part of the £1.6bn shortfall, first reported by the Times – with the rest of the gap filled by spending cuts elsewhere.
Reeves and her team were already braced for a renewed backlash over welfare as they prepared to publish impact assessments alongside Wednesday’s statement, which will show the full impact of the cuts.
The additional measures are expected to include freezing the extra universal credit payment made to those people least able to work until 2030, after an initial cut.
Some frontbenchers had previously suggested they could quit over a proposed freeze to Pip, which was not included in Kendall’s package.
Despite the last-minute scramble to find savings, the chancellor is nevertheless expected to strike a robust note when she addresses MPs, facing down growing speculation she will be forced to raise taxes – perhaps as soon as the autumn.
The additional £2.2bn defence spending for next year is a down payment against the government’s target of spending 2.5% of GDP on defence – paid for by cutting aid spending and dipping into the Treasury reserve.
The chancellor will reiterate the government’s “ambition” to spend 3% of GDP on defence in the next parliament, “as economic and fiscal conditions allow”. She is also expected to squeeze future Whitehall spending plans to ensure she is on target to meet her self-imposed fiscal rules, despite weaker OBR projections – with full details to be set out in June’s spending review.
Since the OBR last gave its assessment in October, government borrowing costs have risen and economic growth has been weaker than hoped. Reeves will underscore her determination to go “further and faster,” to kickstart the economy.
Some in Labour had urged Reeves to flex her fiscal rules instead of outlining future spending cuts – but the Treasury fears that any sign of indiscipline would risk spooking bond markets and driving borrowing costs up further.
One Labour source said ministers have become frustrated with the way the OBR process works, with last-minute forecast changes significantly affecting policy. “They think the process needs to change, but they can’t go around, for market reasons, shaking it up too much,” they said.
With Donald Trump’s administration withdrawing from transatlantic defence cooperation and threatening to impose sweeping tariffs next month, Reeves will repeatedly stress how much the global context has changed.
“Our task is to secure Britain’s future in a world that is changing before our eyes. The job of a responsible government is not simply to watch this change,” she will say.
But analysts warn that these historic shifts mean that even after promising spending cuts, Reeves may still have to increase taxes to meet rapidly growing pressure for higher defence spending.
Paul Johnson, director of the Institute for Fiscal Studies, said: “Even a small change to the spending plans is going to make this an even more difficult spending review in June, and I think the bigger risk is that we get speculation starting on Thursday about which taxes are going to rise in the autumn – and I think that is really quite politically risky, and economically damaging.”
Paul Dales, chief UK economist at consultancy Capital Economics, said: “We just don’t know how they intend to increase spending above 2.5% – that’s the really big one. That’s what’s changed.” He added: “The thing that’s really going to have to shift is her pledges on tax.”
Prof Jonathan Portes, of King’s College London, said: “I don’t think they should be making big policy changes now, but I do think over time they will have to reform and increase taxes.”
Reeves will tell MPs the move to increase defence spending, which saw the development minister Anneliese Dodds resign in protest at the aid cuts, was “the right decision in a more insecure world”.
“This government was elected to change our country. To provide security for working people. And deliver a decade of national renewal. That work of change began in July – and I am proud of what we have delivered in just nine months,” she will say.
The chancellor and her Treasury team have been trying to limit the likely fallout from Wednesday’s announcement, aware that both the cuts to Whitehall departments and the welfare impact assessments are likely to cause anger on the Labour benches.
One Labour MP said: “Wednesday will be just as important for those impact assessments as for the spring statement itself – that’s when people will start to make their mind up about whether they will vote for these cuts or not.”
Officials say they are planning to hold a vote on the changes to personal independence payments in May, with about 30 Labour MPs currently thinking of rebelling.
Darren Jones, the Treasury chief secretary, held a meeting with about 100 frontbenchers on Tuesday to lay the ground for the spending cuts to come. People who attended that meeting told the Guardian he had spent much of it insisting that the spending reductions did not amount to austerity, given they are around half the scale of those made by George Osborne as chancellor from 2010 to 2015.
Wes Streeting, the health secretary, told the Guardian on Tuesday: “We can’t do everything for everyone, everywhere, all at once. There are lots of things we would like to do now, but we’re having to bide our time so that we can fix the economy, because having those firm economic foundations is the essential prerequisite for everything else we need.”
Reeves will announce details of a government transformation fund that Whitehall departments will be able to bid into, to pay for productivity-boosting projects such as overhauling out-of-date IT. Treasury ministers claim this will allow them to do more with less in future years, easing the impact of tighter budgets on public services.
She will confirm on Wednesday she will start moving money from the aid budget to defence immediately, dashing the hopes of some Labour MPs who hoped the cuts to the development budget would be delayed until 2027.
Sarah Champion, the Labour chair of the international development committee, said: “The government’s statement on cutting aid has had a chilling effect on development projects and staff morale, but it has also had very real consequences. Contract renewals are paused and new projects on hold. Whichever way to pack it, cuts are happening now.”
The £2.2bn increase in defence spending from April will bring the country’s military spending up from 2.3% in 2024-25 to 2.36% in 2025-26. Ministers have promised to hit the 2.5% target in two years’ time.
The shadow chancellor, Mel Stride, said Reeves, not global events, was to blame for the slowdown in the economy. “Our national security demands a strong economy. Yet since Rachel Reeves’s first budget, growth is down, borrowing is up and business confidence has been destroyed,” he said.
A government spokesperson said: “We have set out a sweeping package of reforms to health and disability benefits that genuinely support people back into work, while putting the welfare system on a more sustainable footing so that the safety net is always there to protect those who need it most.”
Additional reporting Aletha Adu
